Can Nintendo Play a Winning Come-From-Behind Game?

Nintendo appears to have fallen into a deep ditch, reporting its first-ever yearly operating loss. Whether it will continue to spiral downward or come up with a strong rebound strategy is the question. "These earning results are definitely a wake-up call for the company," said IGN Entertainment's Scott Mucci, "but if anyone can turn it around in gaming, it is Nintendo."

By Erika Morphy
04/26/12 3:09 PM PT

Nintendo has reached a dismal milestone: For the first time ever, it posted a fiscal year operating loss -- down US$458 million for the year just ended.

It is an ignominious turn of events for the company, which created legendary games like "Super Mario Brothers" and innovative devices like the Wii.

It's clear that not even Nintendo could withstand the paradigm shift that mobile devices have triggered.

"What is ailing Nintendo is that the casual gamer has many more choices today than even a few years ago," Michael Pachter, managing director of equity research at Wedbush Securities, told the E-Commerce Times.

A lot of these options -- games on Facebook for example -- are free, he noted.

"It's not that Nintendo doesn't give good value -- it does," Pachter said. "It's just that free is always better than $40, especially for a casual gamer."

Questionable Forecasts

Nintendo's issues go beyond robust competition from smartphones, tablets and social media. It didn't correctly forecast sales of the Wii for this fiscal year -- it sold 9.8 million after expecting to sell 13 million. It underestimated sales of its new 3DS handhelds as well.

None of this, of course, is a shock to shareholders, or at least it shouldn't be.

Sales of the 3DS have been weak almost from the start, which was something of a surprise. Hindsight analysis determined that it was priced too high, and the software lineup at launch was too weak. Combined, these factors led gamers to hold back on making a purchase. Nintendo cut the price after a few months, but the device never seemed to hit its stride.

Nintendo has been posting weak quarterly earnings as a result of these trends. Last summer, President and CEO Satoru Iwata agreed to halve his salary after a particularly dismal quarter.

There will only be more of the same unless Nintendo makes a dramatic shift, Pachter warned. Kids -- Nintendo's next-generation customer base -- are getting smartphones at younger and younger ages, as prices and data plan costs drop.

A Deeper Malaise

Ninendo's issues go even deeper than the smartphone-everywhere trend, said Rob Enderle of the Enderle Group.

Handheld gaming is on the ropes, he told the E-Commerce Times, subsumed by smartphones and tablets.

What's worse is that Nintendo doesn't even recognize that the Wii is a fad, said Enderle.

"Fad products are problematic like that," he said. "Only Apple has been able to serially replace one fad with another, but even they had to make dramatic changes from the iPod to the iPhone, and now to the iPad. Nintendo -- like Palm, RIM, Motorola and other vendors who lived on fads for a while -- didn't seem to understand what made the Wii so successful initially and thus were unable to recreate that success."

It's doubtful Nintendo will be around by the end of this decade, Enderle remarked.

Focus on Distribution

Nintendo still has the ability to right its listing ship, suggested Scott Mucci, director of research and insights at
IGN Entertainment.

It will be a while before competitors bring out their next-generation high-powered consoles, he told the E-Commerce Times. Also, Nintendo still has a strong library of titles.

It does need to focus on the distribution side of its business, though, Mucci added.

"Microsoft and Sony are making a lot of money off their respective networks," he said. "Nintendo has to do more in this area."

The good news is that Nintendo is saying all the right things about its distribution focus. "Now all they have to do is execute," said Mucci.

"These earning results are definitely a wake-up call for the company," he concluded, "but if anyone can turn it around in gaming, it is Nintendo."